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Rear Adm. Tom Druggan is commander of the 8-Division strong Naval Surface Warfare Center (NSWC) HQ. He leads more than 18,000 scientists, engineers, technicians and support personnel located across the United States. A native of Lexington, Kentucky, Druggan is a 1989 graduate of the U.S. Naval Academy, and previously commanded the Aegis ballistic missile defense […]

$270 million deal combines microwave products and C4ISR expertise

Just a few months ago, Herley Industries Inc. executives were briefing financial analysts on the health of the defense contractor and microwave supplier with a presentation that trumpeted the company’s optimistic outlook as a “new beginning.”

For San Diego-based Kratos, the Herley merger is clearly a milestone for a company that was a complete laggard just a decade ago. In fact, the company formerly focused on the arcane area of wireless infrastructure. Kratos – and its stock – got slaughtered in the “dot com” meltdown of 2001.

Consider that in 2003 the company didn’t have a single federal contract, let alone any promising Pentagon business. But after Eric DeMarco joined the firm and became CEO, he engineered a total corporate restructuring that led the company on an aggressive growth agenda.

Today, Kratos is a wide-ranging federal contractor that has made formidable moves into information technology (IT) and cybersecurity. A recent acquisition moved the firm into the list of approved vendors for the sprawling $50 billion federal Alliant technology program available to every Pentagon agency.

Moreover, just days after disclosing the Herley merger, Kratos announced that a team it leads won a multi-year award with an undisclosed national security client valued at $750 million. The Kratos team will provide command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) services that could be worth $1 billion if all options are exercised, the company said.

Landing Herley, defense analysts noted, is a major coup and not just because it is one of the larger acquisitions to date for Kratos. For roughly the past 45 years, Herley has maintained a reputation for supplying innovative and sophisticated RF, microwave and millimeter-wave components and subsystems to the defense and aerospace industries.

In its most recent financial update, Herley said federal sales, mostly to the Pentagon, accounted for about 15 percent of revenues. Defense giants Northrop Grumman and Lockheed Martin accounted for 20 percent and 13 percent of sales respectively, the company said.

Measured by key financial metrics, the two firms are roughly the same size. Kratos has a market cap of about $260 million while Herley’s total stock was valued at about $266 million. Nevertheless, Kratos shares recently traded at about $14 each while it paid $19 a share to acquire Herley.

“The signing of the merger agreement between Kratos and Herley is a defining day for both organizations,” DeMarco said. He described the two firms as two of the “premier defense and national security businesses in the industry today, with expertise in C5ISR, weapons systems sustainment and specialized national security programs.”

As often happens with surprise mergers, the news generated threats of shareholder litigation accusing Herley of not seeking higher bids for the firm. Analysts noted this type of litigation rarely prevents defense-industry mergers.

Kratos said it intends to continue with plans to issue roughly 4.25 million new shares to the public at about $13.25 each to help fund the Herley merger. The company also said it has arranged a debt financing worth more than $300 million, adding it generated roughly $120 million in revenue in last year’s fourth quarter.